Thursday, July 22, 2010

Is uncertainty good for bull run?

(Market Watch)"It is pretty obvious looking at the way markets have been trading of late that there is a lot of uncertainty over the growth outlook. But for the Fed chairman to admit it in such a direct manner does not exactly inspire confidence among investors," said Khoon Goh, senior economist at ANZ Bank in Wellington. "It is clear that the Fed will not only continue to stay on hold for a long time, but there is a chance that the Fed may have to do more to provide support to the economy."

Uncertainty of the economic growth will have two possible effects:

One, the higher the uncertainty, the less risk the Fed will want to take to derail recovery. The lesser risk they want to take, the longer they keep the rate low. The extended period of time of low rate will leave the whole system awash with liquidity. Plenty of liquidity will drive the financial asset prices up. Bubble again?

Two, the higher the uncertainty, the less attractive the developed market becomes. Thus the speculation and love of emerging markets will be back. Carry trade will be back in a big time and will be back in a very stylish way. Decoupling theory again?

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